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October 27, 2009

Are North American Companies Improving Their Climate Change Performance?
    by Robert Kropp

A new report from EIRIS finds that reporting and short-term reduction targets are comparable to global peers, but that North American companies lag in third-party verification and linking executive compensation to emissions reduction. -- With climate change legislation finally appearing to be making some headway in the US, and with the Environmental Protection Agency (EPA) having recently issued regulations mandating greenhouse gas (GHG) emissions reporting by high-emitting US companies, a new report from Ethical Investment Research Services (EIRIS) entitled "2009 Climate Change Tracker: North America" arrives at an opportune moment. EIRIS is a global provider of research into corporate environmental, social, and governance (ESG) performance.

Basing its findings on information provided by North American companies listed on the FTSE All World Developed Index, the EIRIS report analyzes responses of very high or high impact companies in the US and Canada, comparing them to their global peers. The US has 143 very high or high impact companies listed on the FTSE All World Developed Index, and Canada has 22.

EIRIS bases its definitions of impact on both the direct emissions of corporate operations, as well as indirect emissions from such sources as supply chains. Examples of very high impact companies are those in the oil and gas or electricity generation sectors, while food producers are an example of a high impact sector. On average, very high impact sectors have an average carbon intensity that is 125 times that of low impact sectors, and that of high impact sectors is five times higher. spoke with Stephanie Maier, Head of Research for EIRIS, about the findings of the report.

"We found that North American companies lag behind their European counterparts in some areas, which is not surprising given the existing policy framework and the lack of clear governance," Maier said. "But the good news is that there has been improvement, due to the positive influence of responsible investors and the likelihood of operating in a stricter regulatory environment."

For this and other climate change reports that EIRIS has produced, it developed a set of indicators to measure corporate responses to climate change in the areas of governance, strategy, disclosure, and performance. EIRIS aggregates corporate responses to climate change into five assessment grades ranging from no evidence to advanced.

The report found that the climate change response of North American companies is comparable to that of its global peers, with 19% recording a good response, compared to 23% globally. Ninety-three percent of North American companies have a corporate-wide climate change policy, and 57% have committed to short-term GHG emissions reduction targets.

According to the report, "The comparable performance of North American companies to that of global peers could be due to various factors including pending or existing mandatory emissions targets, pressure from the investor community and extent of companies' global operations."

However, Maier offered a caveat regarding the findings. "Disclosure among North American companies is improving, but few companies have an advanced quality of disclosure compared to European counterparts," she said. "We find an impetus for companies to be disclosing on climate change, but they tend to lag behind on reporting of broader ESG issues."

One area of governance in which North American companies lag behind to a significant degree is in the linking of executive compensation to GHG emissions reduction. Only 16% of companies have committed to such linkage, compared with 28% of companies at the global level.

Aisha Husain, an EIRIS Research Analyst and the author of the report, told, "Governance indicators include linking remuneration, participating in international policy debate in a positive way, and forming a strategy in terms of setting emissions reduction targets."

"You can see by the percentage of North American companies linking executive compensation to how they address climate change, that not a lot of them are doing so," she said.

The report found that overall disclosure on climate change by North American companies is of poorer quality than global peers. While North American companies performed comparably in the areas of reporting absolute emissions, disclosing scope of data, and providing quantitative assessments of risk and opportunities relating to climate change, they lagged significantly behind their global peers in having data verified externally. Only 35% do so, compared with 51% of companies globally.

Maier said, "The companies have followed the Greenhouse Gas (GHG) Protocol, but show a lack of external verification thus far."

Convened by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) in 1998, the GHG Protocol is an international accounting tool for businesses and other organizations to quantify and manage GHG emissions. In North America, the Climate Registry, which was founded on the GHG Protocol Corporate Accounting and Reporting Standard, currently lists 349 organizations in its membership.

Regarding the issue of external verification of corporate climate change disclosure in the US, Husain said, "Companies state that their procedures are checked by the EPA. But we'd have to check if the EPA does verification."

In its recent ruling on the reporting of GHG emissions by large emitters, the EPA included language pertaining to verification of corporate data. The agency would not require third-party verification, but self-certification with EPA verification instead. The agency would review the emissions data and supporting data submitted by reporters, in order to verify that the GHG emission reports are complete, accurate, and meet reporting requirements.

The EIRIS report concludes with recommendations for investors. They are advised to integrate carbon risk factors into company analysis, and increase the proportion in their portfolios of best practice companies in very high and high risk sectors. The report also urges investors to engage with laggard companies, and suggests that the possibility of climate change legislation presents an opportunity to do so effectively.

"Our clients are trying to understand the impact of climate change on their investments, and changes in patterns of consumer demand in response to regulatory changes," Maier said.

Husain added, "Climate change is an area where investors have been making an impact, and they should continue to do so. With some companies making progress, it's time to push the laggard companies to do the same."

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